This series analyzes investor sentiment toward the financial sector in the US, with particular focus on subsectors such as regional banks, insurance, and capital market ETFs. We will study these using technical indicators such as moving averages, the Relative Strength Index, and fund flows.
In a statement on November 4, the Federal Reserve chair, Janet Yellen, noted that there was “a live possibility” that the Fed might raise the benchmark interest rate in December. A positive jobs report and falling unemployment data released on Friday, November 6, further supported the possibility of a rate hike at the December Federal Open Market Committee (or FOMC) meeting. This led to positive fund flows to financial sector ETFs. Regional banks and insurance sector ETFs gained more than the overall sector while capital market ETFs lagged in terms of flows.
Overview of XLF
The Financial Select Sector SPDR ETF (XLF) ETF is the most liquid financial ETF, with $51 billion in shares trading every day. The largest holdings of this ETF are Wells Fargo (WFC), Bank of New York Mellon (BK), JPMorgan Chase (JPM), and Bank of America (BAC). During the week ended November 6, XLF gained 2.7%.
On November 6, the Financial Select Sector SPDR ETF (XLF) closed at $24.73. This is above its 100-day moving average of $23.35, its 50-day moving average of $24.25, and its 20-day moving average of $24.06.
Moving averages can be analyzed in two ways. The first is a price crossover, which occurs when the stock price crosses a moving average, signaling a potential change in trend. The second method uses moving averages of two or more lengths. When a shorter timeframe moving average crosses over a longer timeframe moving average, it is seen as a buy signal and vice versa. In the above chart, we can see XLF has crossed over its 100-day moving average on October 9 and has been trending upward since then.
The Relative Strength Index (or RSI) is a technical indicator that is used to study overbought and oversold levels of a stock. Generally, if the RSI is above 70, it indicates the stock is overbought. An RSI figure below 30 suggests that a stock has been oversold.
In the chart above, we can see that the 14-day RSI for XLF is 57.8, suggesting it is nearing overbought levels. However, it has not yet approached an overvalued level.
Read on to the next part to explore the fund flows to XLF.